Question 1

Expenses of a vacation home allocated to rental use are deductible for AGI.

Accepted Answer

Expenses related to a vacation home that is used for rental purposes can be deducted as a rental expense, which is classified as an above-the-line deduction for AGI. This includes expenses such as property taxes, mortgage interest, utilities, insurance, repairs and maintenance, and depreciation.

Question 2

A self-employed taxpayer reports home office expenses as for AGI deductions while employees report home office expenses as from AGI deductions.

Accepted Answer

Self-employed taxpayers report home office expenses as for AGI (above-the-line) deductions, while employees generally cannot deduct home office expenses unless they qualify for specific exceptions.

Question 3

Taxpayers are allowed to deduct real property taxes at the time they pay estimated real property taxes to an escrow account established by the lender for the taxpayer's property taxes.

Accepted Answer

The deduction timing is based on when the actual taxes are paid to the taxing jurisdiction, not when the homeowner makes payments for taxes to the escrow account.

Question 4

When a taxpayer finances her personal residence, in general, she may not deduct points paid for loan origination fees, but she may deduct points paid as prepaid interest.

Accepted Answer

The answer of When a taxpayer finances her personal residence,...

Question 5

In certain circumstances, a taxpayer could rent her personal residence at a profit and not pay any tax on the income.

Accepted Answer

According to the IRS, if a taxpayer rents out her personal residence for fewer than 15 days in a year, the income generated from the rental is tax-free. Therefore, if the taxpayer rents out her personal residence for fewer than 15 days and makes a profit, she will not have to pay any tax on the income.

Question 6

Under the tax law, a taxpayer's itemized deduction for home mortgage interest in any one particular year is limited to $10,000.

Accepted Answer

The $10,000 limit applies to state and local tax deductions, not home mortgage interest. Mortgage interest deductions are subject to different limits based on the loan amount and date of the mortgage.

Question 7

Taxpayers with home offices who use the actual expense method for computing home office expenses must allocate indirect expenses of the home between personal use and home office use. Only expenses allocated to the home office use are deductible.

Accepted Answer

This statement is true. Taxpayers who use the actual expense method for computing home office expenses must allocate indirect expenses of the home between personal use and home office use. Only expenses allocated to the home office use are deductible.

Question 8

A tax loss from a rental home is a passive activity loss.

Accepted Answer

A tax loss from a rental home is considered a passive activity loss, which means it can only be used to offset passive activity income. It cannot be used to offset other types of income, such as wages or salaries.

Question 9

Taxpayers who use a vacation home for both personal and rental use generally must allocate expenses associated with the home to the personal use and to the rental use.

Accepted Answer

According to IRS rules, taxpayers must allocate expenses associated with a vacation home between personal and rental use based on the number of days the home is used for each purpose. This allocation affects the amount of rental income that is subject to tax and the amount of expenses that can be deducted as rental expenses.

Question 10

Taxpayers with high AGI are not allowed to deduct home mortgage interest expense.

Accepted Answer

Taxpayers with high AGI can still deduct home mortgage interest, but the deduction may be limited based on the amount of the mortgage and other factors.

Question 11

A taxpayer is not allowed to deduct home mortgage interest on debt unless the debt was incurred to acquire or construct the home.

Accepted Answer

The answer of A taxpayer is not allowed to deduct...

Question 12

In terms of allocating expenses between rental use and personal use, the IRS method of allocation tends to allocate more expenses to personal use than does the Tax Court method of allocation.

Accepted Answer

The IRS Method uses the total personal and rental days as the denominator whereas the tax court method uses the entire year. The tax court method results in a smaller percentage allocated to rental days and larger percentage allocated to personal use.

Question 13

A taxpayer who is financing his personal residence and who pays points on the loan in the form of prepaid interest generally must deduct the points over the life of the loan no matter whether the loan is an original loan or a refinance of an existing loan.

Accepted Answer

Points paid on an original loan to purchase a primary residence can be fully deducted in the year they are paid, while points on a refinance must be deducted over the life of the loan.

Question 14

The longer a taxpayer plans on living in a home without refinancing the taxpayer's mortgage on the home, the more likely it is that paying points to receive a reduced interest rate on the loan makes economic sense.

Accepted Answer

Paying points upfront to receive a lower interest rate can save money in the long run. However, it takes time to recoup the upfront cost of the points. If a taxpayer plans to live in a home for a longer period of time without refinancing, they will have more time to recoup the cost of the points through the savings on the reduced interest rate. Thus, it is more likely that paying points makes economic sense in such a scenario.

Question 15

When allocating expenses of a vacation home between personal use and rental use, the amount of depreciation expense allocated to the rental use is based on the number of rental days over rental days plus personal use days.

Accepted Answer

The statement is true. Depreciation expense for a vacation home is allocated between personal use and rental use based on the number of days the property was used for each purpose. The rental use portion of depreciation expense is calculated as the number of rental days divided by the total number of days the property was used (both rental and personal use).

Question 16

A taxpayer who purchases real property during the year is allowed to deduct the property taxes on that property for the entire year in which the property was purchased.

Accepted Answer

The deduction is based on proportion of the year the taxpayer lived in the home no matter who actually pays the tax.

Question 17

Taxpayers renting a home would generally report the rental income and expenses on Schedule E.

Accepted Answer

Taxpayers who rent a home typically report their rental income and expenses on Schedule E of their tax return. This is where they can report the amount of rental income they received, as well as any deductions they are eligible for, such as rental expenses like utilities and maintenance costs.

Question 18

The amount of a taxpayer's itemized deduction for all taxes combined, including state income taxes and real property taxes, is limited to $10,000 ($5,000 if married filing separately).

Accepted Answer

This is a provision in the recently enacted Tax Cuts and Jobs act effective in 2018.

Question 19

Jorge owns a home that he rents for 360 days and uses for personal purposes for five days. Jorge is not required to allocate expenses associated with the home between rental and personal use.

Accepted Answer

The home is considered a nonresidence. When property that is rented during the tax year is used for even a day for personal purposes, the expenses must be allocated between the rental usage and personal usage.

Question 20

Jennifer owns a home that she rents for 364 days and uses for personal purposes for one day. Jennifer is required to allocate expenses associated with the home between rental and personal use.

Accepted Answer

This is true according to IRS rules. Jennifer must allocate expenses between rental and personal use based on the number of days the home was rented out and the number of days it was used for personal purposes. This allocation affects the tax treatment of expenses such as mortgage interest, property taxes, and maintenance costs.

Quiz 14: Tax Consequences of Home Ownership